Dell (NASDAQ: DELL) shares plunged 11% Tuesday to their lowest level since April 1998, but investors remain far more focused on the fate of faltering insurance giant AIG (NYSE: AIG).
Dell and Ingram Micro (NYSE: IM), off 2.7%, both warned of weakening demand, suggesting that financial sector troubles are beginning to be felt in the IT sector.
But stocks rebounded after hitting two-year lows on hopes that the government could rescue AIG. But those hopes were dealt a blow after the close when Bloomberg reported that the company could be placed into conservatorship, which might be preferable for the rest of the financial sector than outright bankruptcy. But other reports said the government might not have legal authority for a conservatorship of AIG, which would be similar to what it did with Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) just a week ago.
According to CNBC, government officials believe market response to Lehman’s (NYSE: LEH) bankruptcy was worse than expected, creating urgency to find a solution to the much bigger AIG problem.
AIG’s troubles have been accelerated in recent days by credit rating downgrades that have forced the company to raise capital quickly. Credit rating agencies have come under criticism for first giving their blessing to complex debt instruments and then by hastening company downfalls from those instruments with belated credit downgrades.
With Lehman as a test case, officials apparently have concluded that the systemic risk posed by an AIG bankruptcy might be too big for financial markets and the economy to handle.
So far the real economy has held up remarkably well in the face of what might be the worst financial crisis since the Great Depression, but the ongoing crisis will likely constrain investment and lending, weighing on the real economy, as Dell’s warning demonstrated.
But stock indexes posted 1% gains on the day despite the looming threat.
HP (NYSE: HPQ) rose nearly 7% after announcing a massive restructuring plan.
VMware (NYSE: VMW), Micron (NYSE: MU), Microsoft (NASDAQ: MSFT), Apple (NASDAQ: AAPL), Oracle (NASDAQ: ORCL), Broadcom (NASDAQ: BRCM) and Sun (NASDAQ: JAVA) were some of the names left behind by the rally.
After the close, SanDisk (NASDAQ: SNDK) soared on a takeover offer from Samsung, and Adobe (NASDAQ: ADBE) rose after beating estimates.
The Nasdaq rose 28 to 2207, the S&P climbed 21 to 1213, and the Dow rose 141 to 11,059. Volume rose to 9.57 billion shares on the NYSE, and 3.25 billion on the Nasdaq. Decliners led by a 19-15 margin on the NYSE, while advancers led 16-12 on the Nasdaq. Upside volume was 64% on the NYSE, and 67% on the Nasdaq. New highs-new lows were 24-1165 on the NYSE, and 47-464 on the Nasdaq.